Insight
July 10, 2024
Over the past few weeks, large holders of bitcoin balances have emerged as sellers, weighing on price and sentiment, but more so than would be indicated by commonly used transaction cost analysis (TCA) tools. Since the first specter of large sellers appeared, the consolidation of balances by the Rehabilitation Trustee for Mt Gox on May 28th, the price of bitcoin has fallen 17.4%. But applying TCA via stock market analogues suggests that even if ALL the potential bitcoins were to come to market, which they haven’t, the recent price action by bitcoin may be exaggerated.
Over the past week, three large holders of bitcoin balances have impacted the market: the US government, German law enforcement (BKA), and the Rehabilitation Trustee for Mt Gox. The US government is by far the largest of the three, holding 213.3K bitcoins ($12.0B) according to data from Arkham Intelligence. These were acquired from the collective seizures of bitcoins, mostly stemming from the closure of the Silk Road darknet market (2013) and the hack of Bitfinex (2016). The Rehabilitation Trustee in the Mt Gox bankruptcy case (2014) holds 139K bitcoins ($7.8B) and has been preparing to distribute a portion of those coins to long-standing creditors in the bankruptcy case. Finally, the Federal Criminal Police Office (BKA) in Germany presently holds 22.8K ($1.3B) of the 50K bitcoins it originally seized in the closure of illegal video streaming site Video2K in January of this year.
Traders (and more importantly creditors) have been eagerly anticipating the resolution of the Mt Gox bankruptcy case, with the Rehabilitation Trustee setting a deadline of October 31, 2024, for the distribution of some of the coins. Now there is finally progress being made on this front, as some coins have started moving into the hands of creditors. However, it was the consolidation of balances held across many addresses that initially caused market unease - blockchain activity that well preceded distribution to creditors.
While the resolution of the Mt Gox has been a highly watched item, sales from the US government and the BKA were less well telegraphed. In both cases, we saw no prior indication that sales were being readied. The US government has at times disclosed sale plans, but as we pointed out recently, it has not always stuck to its word. The BKA sales have been even more puzzling. On chain analytics show outflows of varying amounts over irregular intervals to an increasing array of exchanges and OTC desks. There are even instances where service providers (exchanges and OTC desks) appear to be sending bitcoins BACK to BKA, and not in insignificant amounts either (tens of millions of dollars). Regardless of this perplexing on-chain activity, BKA is not likely to be a long-term holder of bitcoin. The good news is that it has already offloaded much of its position, with current holdings down to 13.1K bitcoins (much lower than our table above using yesterday's data).
Bloomberg’s transaction cost analysis (TCA) function is a popular feature that allows traders to gauge the price impact of their trades using statistical metrics such as volume and volatility. This is especially crucial for executing large or block trades. While this type of information isn’t explicitly available for bitcoin, we can analyze equity market proxies to see what bitcoin trading might look like.
We use the entire holdings of the US government, BKA, and Mt Gox trustee as the upper bound for selling that might occur and analyze this in the context of a block “secondary offering”. This totals 375.1K bitcoins, or 1.9% of the total bitcoins in existence. We picked a variety of high flying and high valuation technology companies, including Nvidia, Telsa, and GameStop as well as bitcoin proxies, the iShares Bitcoin Trust ETF and MicroStrategy. In each of these cases, we assumed a similar share of the total shares outstanding would need to be sold in a block trade, 1.9%. Using that ratio gives us a trade amount in number of shares with which to run a transaction cost analysis.
As can be seen from the following table, the smallest estimated price impact of selling 1.9% of the shares outstanding in a block trade is 2.8%, while the largest is 11.2%. Bitcoin, however, has already seen a 17.4% drop in its price, far greater than the maximum impact observed from similar stocks. We also don’t expect the entire US government balance or even Mt Gox coins to be sold at once, as this analysis implies. Our estimate for the number of bitcoins that could be coming to market soon in the Mt Gox case is only 22.3K of the original 141.7K bitcoins held by the trustee.
There have been a number of reports published by crypto analytics firms pointing to miners selling as exacerbating the price declines. However, June production and holdings reports by public miners refutes this notion. This data indicates (we are missing June data from Mawson and Dmg who have not reported yet, so their results are exclude from the entire time series) that public miner sales rose slightly month-to-month (71 BTCs), but balances held on public miner balance sheets continue to climb to levels well above their 2022 highs.
There are limitations to what blockchain analytics can tell us. Identifying that bitcoins move to an exchange or OTC desk, even if done correctly, only tell us that coins moved. That’s it. They could’ve been posted as collateral or lent out, not necessarily sold. We point this out because of the factually incorrect assertion from CryptoQuant’s CEO claiming that Marathon sold 1,000 BTC in June to cover expenses, a post that caused quite a stir in the market. While the company denied the fact, as did we, we now have June production and holdings data. What did Marathon actually do during June? It ACQUIRED 89 bitcoins above and beyond its monthly production, not sold. Moral of the story is don’t believe everything blockchain analysis purports to tell us, especially if the assertions are strong.
We understand that public miner activities don’t explain every miner’s behavior. It may be that public and private miners are behaving differently. Our preferred on-chain metric for miner positions is bitcoins held 1 hop from the coinbase address (not the exchange, the block reward destination), which did show a steep decline in May (37.4K BTCs or ~$2.5B), but balances are just back to where they were in March. Again, we wouldn’t rely too heavily on this data given the limitations of blockchain analysis and knowing real world activities precisely.
We understand that the appearance of large sellers can have a psychological effect on the market, especially as bitcoin has largely been range bound the past few months while other risk assets zoom to new highs. While emotions and psychology may rule over the short-term, our analysis suggests that the price impact from potential selling may be overblown. We aren’t oblivious to the fact that other factors may be at play here, but it is reasonable to think that the rational investor may find this an interesting opportunity created by irrational fears.
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